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Six drivers that determine where investors spend money abroad

In search of markets that promise rapid growth, investors have increasingly focused on countries in Southeast Asia and Latin America.

Private-equity and venture capital investors have begun to look beyond Brazil, Russia, India, China and South Africa, known as the BRICS countries, according to a global attractiveness index that was developed by researchers at the Emlyon Business School in France and the IESE Business School in Spain. Foreign direct investments by companies have followed a similar trend, according to an index business consultancy A.T. Kearney developed based on global surveys of executives.

Countries that consistently gained in attractiveness include Malaysia and Indonesia in Southeast Asia as well as Colombia, Peru and Chile in Latin America, the venture capital/private equity (VC/PE) country attractiveness survey suggested. In all of these countries economic activity increased considerably. Some also saw large improvements in taxation matters and in the depth of their capital markets.

“The size of a population, combined with expected economic growth, is a simple indicator of deal opportunities,” the researchers stated in their 2013 report on the VC/PE country attractiveness index. “Investors seek to capitalise on the combination between expected growth and large populations.”

A.T. Kearney’s index reflects how likely respondents felt a direct foreign investment in a particular country is. The index ranks the 25 countries most likely to receive foreign direct investments based on survey responses of more than 300 executives from 28 countries.

What attracts investors

The VC/PE country attractiveness index is a composite measure of data that reflects six key drivers of country attractiveness for venture capital and private-equity investors that the French and Spanish researchers collected and analysed for 118 countries.

Economic activity, which includes an economy’s size and employment levels, is the first key driver to attract venture capital and private-equity investors, because it reflects a country’s economic growth and entrepreneurial potential.

Depth of capital markets measures how well-developed a country’s stock market is, banks’ attitude toward lending and investing, and whether financial incentives are in place to reward entrepreneurs.

Taxation reflects a country’s tax regimes, which matter for business entry and exit.

Entrepreneurial culture and deal opportunities reflect the innovation capacity and research output of an economy.

The VC/PE country attractiveness index ranked most developed countries in the top 20, including the US in the top spot, as well as Canada (2nd), the UK (3rd), Japan (4th), Australia (6th), Germany (7th) and France (19th). The index projected that Asia will remain the fastest growing region in the world for several years to come. The growth projections, in turn, were likely to attract venture capital and private-equity investments.

Malaysia ranked 17th most attractive in 2013, up from 23rd in 2009. Indonesia was 47th, up from 57th in 2009.

The outlook for Latin America was also positive despite the perception that the corruption risk was high. Almost every economy in the region was projected to expand. Chile ranked 25th in attractiveness in 2013 (up from 34th in 2009), Colombia was 39th (up from 47th in 2009), and Peru was 52nd (up from 62nd in 2009).

Moving beyond the BRICS

The BRICS didn’t improve much. Some even lost a few spots in the ranking in both indexes in the past three to five years:

Brazil ranked third on the A.T. Kearney FDI investment confidence index in 2013, the same as the year before and up one spot from 2010. The VC/PE country attractiveness index had Brazil in 36th place, the same as five years earlier and down three spots from 2011. Three of the six key drivers dropped in the rankings over the past five years, particularly economic activity.

Russia improved from 18th three years ago to 11th on the FDI investment index. The VC/PE country attractiveness index had Russia in 40th place, the same as in 2009 but up two spots from 2011. Five of the six key drivers had worsened in the past five years, particularly the social and human environment in the country.

India dropped from third to fifth on the FDI investment index and from 26th to 29th on the VC/PE country attractiveness index. Three of the six key drivers on the VC/PE country attractiveness index had worsened: investor protection and corporate governance; human and social environment; and entrepreneurial culture and deal opportunities.

China went from top-ranked to second on the FDI investment index in the past year. On the VC/PE country attractiveness index, China went from 25th in 2009 to 23rd in 2011 and 24th in 2013. Taxation improved considerably, but the human and social environment in the country worsened.

South Africa dropped four places to 15th on the FDI investment index in the past year. On the VC/PE country attractiveness index, South Africa dropped from 28th to 30th in the past five years. The human and social environment ranked considerably lower in 2013 than in 2009.

“Lack of Experience Flavours Investors’ Perceptions of Africa”: Africa is home to some of the fastest-growing economies in the world. Many of its countries have less corruption, are easier to do business with, and are more democratic than several fast-developing nations in Europe and Asia. But dated perceptions keep many investors away, according to an EY report.

“How to Pick the Next Emerging Growth Hot Spot”: Brazil, Russia, India and China are losing some of their attractiveness, and multinational companies have started to look for the next global growth hot spots, a global EY survey suggests. Find out how selecting new markets has changed.

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